Union Minister of Finance Nirmala Sitharaman while presenting Budget 2023 has proposed that where aggregate of premium for life insurance policies (other than ULIP) issued on or after 1st April, 2023 is above Rs 5 lakh, income from only those policies with aggregate premium up to Rs 5 lakh shall be exempt. This will not affect the tax exemption provided to the amount received on the death of person insured. It will also not affect insurance policies issued till 31st March, 2023.
FM has proposed to take away the tax free advantage from traditional insurance plans if the annual premium is above Rs 5 lakh in a year. The new proposal will not impact taxation of unit-linked insurance plans.
“The income from traditional insurances where the premium is over Rs 5 lakhs will not be tax exempt. While, this will dampen the interest of individuals to buy high value traditional insurances, it will increase the focus on term plans and pure risk covers which is good. A concern is that it should not result in a significant shift towards purely investment oriented unit link insurances,” says Kapil Mehta Co-founder, SecureNow Insurance Broker.
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This means, traditional insurance plans such as Endowment plans and Money back plans will become less attractive to policyholders. The premium is not put into stock market when one invests in any of the traditional insurance plans. As a result, these traditional insurance plans do not experience return volatility. You can estimate the amount you can expect to get upon maturity by making the assumption that your money will grow steadily. They often appeal to conservative investors who are unwilling to invest in stock, even for their long-term objectives.
The sum assured and bonus are paid upon maturity in an endowment plan. A percentage of the sum assured is routinely returned back to policyholders under money-back schemes. For instance, if you pay a yearly premium of about Rs 10,000 for an endowment plan with a ten-year term and an amount assured of Rs 1 lakh, the maturity value will be approximately Rs 1.5 lakh after ten years. A money-back plan can have two payments of Rs. 25000 (from the sum assured) each after every three years and the remaining Rs. 50000 along with bonus upon maturity.
Before purchasing traditional plans, it’s important to understand two things: first, that they have an average return of around 5% and, second, that their liquidity is generally poor. Traditional plans lack flexibility, and the fixed duration lasts till maturity. While partial withdrawals are typically not permitted, early withdrawal from standard plans can be expensive.
